Higher pension for retiring later, is it worth it?

Government Has published a decree in which he uses the carrot (and not the stick) to encourage the effective retirement age to increase in our country. The measure is based on combining two incentives that already existed independently so that the worker has a higher pension if he retires later.

Until now (and since the 2021 reform), when retiring after the legal age, one could choose either an increase in the pension (at a rate of 4% per year) or a single payment (with a relatively complex formula). From now on it will be possible to opt for a combination of both (that is, a single payment equivalent to half of what would correspond if this option is chosen and a 2% increase in the pension for each extra year worked). The big question is if it pays off.

incentives

Both incentives have a different character. The 4% incentive allows you to increase your pension indefinitely, but it will only pay off if you live many years to enjoy it. Life expectancy at age 65 in Spain is approximately 19 years for men and 23 for women. That may be a basis for the calculation but the truth is that there are differences by population, income, lifestyle… In the end there is great uncertainty.

The single payment has less uncertainty but it generates other problems: the first is that if you live a long time it is less of an incentive. The second is that being subject to personal income tax, Fiscally it is worse to receive a single payment than a month-to-month payment.

So it may seem a good idea to combine both situationsOn the one hand, receive an increase in the pension month by month, but also a single payment that punctually assesses this delay in retirement. Personally, it seems good to me that you can choose between these three possibilities.

How to simulate the situation?

In the end, the formulas are quite complex and the best way to see a specific situation is run a simulation. For it the official website of the Social Security It has a simulator with the specific data of each case. There is also an explanation of how it works. Unfortunately, the third button (combine the two previous options) is not yet enabled, but it will surely be implemented shortly.

The simulator is very detailed, it even anticipates changes in inflation, maximum pension, etc. And it is that the 4% supplement (or 2% if it is supplemented with a single payment) is not calculated on the theoretical pension if it exceeds the maximum pension but on the latter. And the sum of the pension plus the supplement can never exceed the maximum contribution base (but the maximum pension can), so Be careful with extending working lives if we are quoting at the limit.

Is it worth it to delay retirement?

Each case is different and it may be useful for many people to postpone retirement for a single payment, a supplement to the pension or a combination of both, especially For people who are coming very close to the end of the month at the end of their working lifehas had some very discontinuous prices and a small increase could come in handy.

The extreme case is a long prolongation of working life. For example, if your working life is extended by 10 years, you could have a supplement of 40% of the pension (as long as the limits are not reached). However, as we have seen before, the “normal” thing in Spain is to live 20 years after 65. Therefore, in this case, only 10 years of pension would be charged, then the total amount would be less than a retirement at 65. For it to pay off, the increase should be greater than 50% (And not even then, because surely taxes would reduce the net amount even more.)

But it is logical: the measure that Social Security puts on the table is to reduce spending on pensions, therefore any incentive to extend working life has to end up paying the retiree less. What Social Security does is “distribute” said savings by informing the worker to encourage him to do so.

This does not mean that it is never payable to the worker, because even if he receives less total amount of pension in total will charge more (because the prolonged years of working life will be receiving from the company, and the sum of the salary of said years plus the increased pension will be greater than the pension without prolonging the working life).

Therefore, it is a very personal decision. the worker is exchanging free time for money. If you keep working, you will lose free time, but you will earn more money (although you will receive, in total, less pension).

Higher pension, single payment or combination?

The other question is, in case of delaying retirement, which of the three modalities to choose. Here it depends a lot on whether there are specific needs for money and the state of health. If there is poor health or money is needed urgently, it is better to take advantage of the single payment.

If major health problems are not expected and you lead an active life, the ideal would be to take advantage of the pension increase, unless you are at or close to the maximum pension.

If we do not like uncertainties or if there is an effect on the maximum pension limit, then perhaps the combined route that has just been enabled is a good halfway point. But always keeping in mind that these punctual payments are highly penalized in the IRPF because they can increase the marginal rate.